Evan Roberts of Chesapeake Brokerage stopped by to meet with Jesse Cunningham V of Mountain View Insurance and give his perspective into the insurance world.
He dives into some great concepts including the golden handcuffs for retaining top employees.
Evan is an advisor to financial advisors. This means that insurance professionals call Chesapeake Brokerage when they need ideas for specific plans, products, and solutions for their clients. What a pleasure to have Evan stop by the office. A ton of info to unpack in this one. Check out the video and learn from a local insurance thought leader. Thank you Evan for your time! https://www.chesapeakebrokerage.com/
Excited to roll out this infographic based on Prof. Jamie Hopkins article of Forbes. Feel free to use it for your website if you are another insurance professional. Code is available below the infographic.
Great question. Why would anyone ever need life insurance? I often get this question from single people, but sometimes from married folks as well. I wanted to write this article to discuss some different things to consider with life insurance. The purpose is to educate you on what life insurance can and cannot do. At the end of it all, then you can decide if there is any point for you to have life insurance. Because remember, everyone’s situation is different and there is never a cookie-cutter solution.
Life Insurance in a Nutshell
At the most base level, life insurance is an agreement between a insurance carrier and an individual. Both parties come to some agreement on the premium amount monthly and the death benefit if the individual were to die. Very simple right? Lets keep it simple because I don’t think it needs to be complicated, at all.
The premium is a fancy word for monthly price. Usually the policy has a level monthly price, but of course there are exceptions.
Okay now, lets build upon that agreement. The individual pays the insurance company a set premium for a set term (a specific amount of time in the contract). If the person passes away during that term then the death benefit pays to the beneficiary – tax free.
The beneficiary is the person receiving the benefit from the life insurance company if the individual passes away within the contract term.
I wanted to reiterate that the death benefit, which is the amount that the companies pays the beneficiary, is paid out tax-free. This is VERY important to remember throughout our discussion.
The big “so-what” of the matter is that a person can insure themselves for hundreds of thousands of dollars for minimal monthly outlay. This is what financial advisers refer to as leverage.
Think about it, I had a 28 year old father call me this past week. He wants to insure himself for around $500,000 of death benefit. We talked about a few options and it seems like a term plus policy (which we can talk about later) is a good fit for now. That policy would cost him between $20-$40/month!
I want to get something straight, right off the bat. If this father were to purchase this policy, pay the premium, be eligible, and pass away the next day, then the WHOLE $500,000 TAX FREE would pay to his beneficiary, which is most likely his wife.
So remember that story if you are in a similar situation. We often purchase insurance for things that may or may not happen, and hopefully he outlives the term of the life insurance policy, BUT if he doesn’t then his wife and daughter and debt-free and can focus on what matters.
Term Life Insurance
This is one of the most basic types of life insurance. Term Life. I’m sure you’ve heard of it. It is affordable, effective, and if properly designed – it can even give you options in the future.
So here it is, term life insurance is an agreement set for a predetermined term. Often it is a 10, 20, or 30 year life insurance term. If the insured dies during the term – then the death benefit will pay to the beneficiary. Very simple.
Where it becomes very powerful is utilizing it for temporary needs such as a mortgage or other timed debts.
Oh yeah, remember I mentioned that it also can give you options for the future if designed properly? Yep, very easy, add what is called a guaranteed insurability rider to the policy and it will give you many options towards other policies. We can get into that now.
Permanent Life Insurance
Very different then a term life insurance policy, PERMANENT life insurance has a set illustration, or schedule, which usually lasts to age 120. We consider this permanent because, I don’t think anyone has lived past that age.
So what is the point of permanent life insurance? There are many – so let’s see how many I can intelligibly write about without getting tired.
Permanent Life Insurance lasts your whole life
It has many more options than term life
It has the potential for cash value build up within the policy
That cash value can be accessed as a tax-free income flow if done properly
The point is that permanent life insurance is almost endless in its approach. Life insurance companies continue to improve their offerings, with new riders, and endorsements, to out-wit their competitors, all to the advantage of the consumer. Lets jump into some of those riders and endorsements now.
Riders and Endorsements
A rider, or endorsement, is an addition to a life insurance policy. They are optional coverage that enhance and change the behavior of the policy. So remember we discussed term life insurance as being the most basic, well it becomes very complex when you start to consider these riders. And please note that riders can be added to any kind of life insurance policy, for the most part. So lets discuss specific riders.
Waiver of Premium for Disability
If you get disabled, and each carrier has different definitions, then this rider will allow you to stop making your monthly premium payment. The life insurance company will technically pay the premium for you.
This rider becomes very alluring when coupled with a permanent policy such as an indexed universal life insurance policy. If someone is purposefully super funding a life insurance policy (we can get into this in another article) then the premium is high and they are doing this to create high cash value. If they get disabled per the definitions of the policy, then that super funded plan continues on, often to age 65. WOW! That changes the game when coupled with a true disability policy. MASSIVE leverage.
If you are deemed terminally ill by a medical professional, then this rider allows you to access a portion of the death benefit while you are alive. Disclaimer: every carrier has different definitions of terminally ill. Some say 12 months to live while other 24. It all depends, but that is why you should rely on your insurance professional to guide you.
Chronic Illness Rider
This is a SHINING STAR in my opinion. If you cannot perform a certain portion of the activities of daily living, then this rider allows you to access a portion of your death benefit while you are alive. This rider is usually reserved for permanent policies such as whole life or universal life insurance policies.
It is similar to a Long Term Care policy but it does have differences. It allows the insured to have some protection in case of of a long term care event. BIG DEAL.
Closing Remarks
This was definitely not an exhaustive list, quiet frankly, I just got tired and need to take a break for a bit. Hopefully you can see that life insurance has many purposes with many different configurations.
Like I stated in the beginning, there is not one cookie-cutter solution for all. There are enough riders and endorsements and different types of policies to create an almost endless variation of life insurance polices. What makes the difference is an insurance professional that cares and is knowledge.
Will insurance ever be more than a “just in case” – one dimensional commodity? It is a tool that allows its users to leverage their money by placing it in a collective pool. If there is a large enough pool, then some predictions can be made with surprising accuracy. The most important predictions for the insurance carrier’s sake, are frequency and severity of future claims. They take their predictions, charge a fee, and provide their clientele coverage. That is how every insurance works but I’m curious if this is this where the function of insurance ends – a one dimensional, just in case coverage? Or is there another way to utilize the massive leverage that insurance affords? I would argue that certain insurances, such as car and home insurance, are one dimensional, and most likely will always be one dimensional. They are purchased with the hope to never use them – a coverage just in case something happens.
Now, what about
life insurance? This is where it gets interesting. Life insurance can be
one dimensional if used as a short-term solution. For instance, a 20-year life
insurance policy to pay off the mortgage just in case the owner passes away
prematurely. The owner may or may not survive the 20-year term, therefore it is
a policy just in case – still one dimensional.
Permanent Life Insurance
But what happens when a permanent life insurance policy is used? Permanent life
insurance is a catch all phrase for policies that are designed to last the
insureds lifetime, and more importantly, pay the benefits one day. Everyone has
a guaranteed mortality, so we’ve just identified a coverage that transcends the
typical “just in case something happens” into a “when this happens one day”
coverage.
Insurance provides massive leverage and when that leverage is coupled with a
guaranteed outcome such as death, it creates a very interesting combination. It
allows for families to build tax-free legacies to pass on to their heirs. It
enables individuals to create cash-value that they can borrow against in the
future, tax-free. What about the huge threat of long-term care costs on a
retiree’s plan? Add a chronic-illness provision to a policy to help hedge that
risk. What happens if the owner of the policy gets disabled and cannot
contribute to the plan? If the waiver of premium for disability provision was
added to the policy, then the insurance company would fund the premiums for the
owner, and the plan would continue. A properly designed, forward thinking,
permanent life insurance policy can be leveraged to hedge against many
different risks of life. There are no cookie-cutter solutions for anything in the
insurance industry and this holds true for life insurance as well. The key is
to identify a goal, recognize potential risks, and design a plan accordingly.
Jesse Cunningham V is the owner of Mountain View Insurance Solutions located in Bel Air, Maryland. Weekly articles and videos are posted on our social medias outlets for the community to be educated, entertained, and empowered. Mountain View Insurance Solutions, 900 South Main Street #104, Bel Air MD 21014
